If there’s one thing my father is proud of when it comes to finances and playing the stock market, it is his contrarian’s methodology - doing the opposite of what everyone else seems to be doing. It seems to have served our family well, as he sold his business and is now somewhat retired in his early 50’s.

Various articles have been reporting lately on the explosive growth of yuan-based savings accounts in Hong Kong, as more and more residents there are opting out of the HK dollar, got me to thinking about my father’s strategy.

According to the International Herald Tribune, Chinese yuan-based savings accounts at Hong Kong banks have soared more than 40 percent this year, to a total of about US$6.8 billion. Experts believe that inflation is still relatively low, so there is no need for a major policy shift, a la de-pegging, for the HK dollar, which is set at 7.8 to the US dollar.

The yuan has appreciated about 15 percent against the dollar since it was de-pegged, and some experts say it has 15 percent more to go this year and could land at about 6.35. It closed yesterday at about 7 to the dollar. A recent article in Asia Times Online adds:

Recent interest rate cuts by Hong Kong banks have given residents added incentive to send their savings across the border. In March, the city’s lenders cut their deposit rates by up to 50 basis points, bringing savings’ rates to as low as 0.01%. Many banks already pay no interest on deposits below HK$5,000 (US$640).

While it seems that the yuan is still undervalued by most measures, the recent small recovery of the dollar’s value seems to suggest that the future is not at all as certain as it seems. It’s hard not to be reminded of the “sure bet” that the Shanghai stock exchange seemed to be even just a year ago, even though it is now off its peak by about half.

The question remains, should you be keeping all your liquid capital in yuan? While my father would likely argue no, it’s safe to say that currency issues are complex.

Inflationary pressures in China, the economic downturn in America, and the Euro’s relative strength are all pulling the Chinese economy in different directions, and certainly no one has a crystal ball.

If Warren Buffet had his say, he’d likely agree that the best approach at this point is still a diversified one, with all your eggs preferably not in one currency basket. He said recently at a meeting, “If I were to land on earth in a UFO and I went to the bank for $1 billion in currency, would I put all $1 billion in the U.S. dollar? No.”

And I’m pretty sure he wouldn’t go solely for the 7 billion yuan either.

    Channel: Local Wisdom     |